# Piecing it Together Pt. 5 — Token Velocity

Aug 30, 2019 · 10 min read

Token Velocity is a subject of growing importance and interest within the blockchain industry. Simply put, token velocity refers to the number of times a token will change hands within a given year. For reference, the US dollar has a velocity of approximately 5.623. A token’s velocity has a direct impact on the value of the network — a high velocity will cause an asset to be devalued, where as a low velocity results in difficulty liquidating the asset, and as such, difficulty realizing the asset’s value.

# Calculating Token Velocity

Velocity = total transaction volume / average network value (market cap)

Vitalik Buterin Model -

MV = PT

M — total number of coins (supply)

V — velocity of money (turnover)

P — price level (in terms of token value, inverse of currency’s price)

T — economic value of transactions (transaction value)

Kyle Samani Model -

Average Network Value (market cap) = total transaction volume / velocity

In accordance with the above formulas, the lower the velocity, the more valuable the network. The formulas do not address the issues that low token velocities may impose on asset liquidity.

# High vs. Low Token Velocity

In short, a high token velocity means that any buying pressure will be nullified by instant selling pressure.

Why does having a low token velocity negatively impact an assets’ value?

Low token velocity refers to situations where there is an inactive market — the asset has low turnover. Based on the formulas above, the network value would increase as a result, but if the asset cannot be transferred or spent, this will ultimately impact its value. The asset may have to be sold at a discount to compensate the buyer for the lack of liquidity.

Cryptocurrencies generally suffer from too high a token velocity (too low a velocity will usually occur if the project itself is undesirable). Despite a network having utility, high token velocity can result in a successful network with a native token that is highly devalued. As project desirability is not the focus here, we will address the issue raised by too high a token velocity.

When would a token be subject to high velocity?

Generally, a token will experience high token velocity when used solely as a “medium-of-exchange.” The currency is not the beginning or end result in a transaction — instead acting as a conduit to move from one asset to another. This use-case is not unique to one cryptocurrency, and can be fulfilled by many things outside of blockchain, i.e cowry shells were used as an early form of money in places such as Africa and Asia. When used solely as a “medium-of-exchange,” the currency is bought only to be sold again instantly or very quickly, propelling it right back into the market, nullifying buying pressure.

# Examples

We can use the example of a pipeline being used to move gold bullion between entities. Gold bullion holds value, it is 1. Unit of account 2. Store of value 3. Medium of exchange. The pipeline itself is a means to move the gold bullion. Although the gold bullion may be held within the pipeline for periods of time, the pipeline itself has no inherent value with the exception of the service it provides.

The “medium-of-exchange” token is the pipeline — which allows us to easily move gold bullion between parties — however, the pipelines’ utility is limited to easily moving the bullion — it does not assume the value of the gold.

In practice, users would buy “x” currency with gold, send this currency to another party, who would instantly sell the currency back for the desired result, gold. The rapid buying and selling of the currency increases token velocity. The token itself never generates any value because no one wants to hold it — creating a situation where we may have a useful network but a token that lacks in value.

Subway Tokens — An Unnecessary Friction Point

Because many of us are not moving gold on a daily basis — let’s take a look at something a bit more commonplace, subway tokens.

Person A spends “x” amount of fiat money on a subway token because the system does not accept dollars. The subway receives their compensation in fiat, Person A pays for the service in fiat, and the token is expended and recycled back into the ecosystem. Person A will most likely not hold onto the subway token for very long — many times tokens are utilized almost immediately after purchase. This instant buying and selling results in high token velocity, and the token itself holding very little value outside being required for your commute. The specific use-case severely limits the token value from being applied to anything else.

The subway company specifies that the token must be used in order to get on the subway. It is not the desired currency of the company, and it is not received as payment for the service. The subway token is an “unnecessary” friction point that users must pass through in order to use a service, which is a case that could be argued for many utility tokens on the market — does this service require a token, why does it not just use Bitcoin or some form of tokenized fiat currency? The lack of a “want-to-hold” factor will ultimately be detrimental to token value.

# XDB & the DigitalBits Network

XDB is a utility token that serves various functions on the DigitalBits network.

This diverse function set works to positively impact token velocity. In addition to the underlying framework and functionality of the DigitalBits network, policies have been put in place to enable the optimization of token velocity. Below we will explore the functions of XDB, and how this affects both token velocity and token supply.

We will use a red, yellow, and green system in diagrams below to reference token velocity.

• Red refers to tokens that will likely never again enter the active token supply.
• Yellow refers to tokens that have the ability to move but will generally not be active.
• Green refers to liquid tokens that will actively move between entities on the DigitalBits network.

Protective Security Feature (Anti-Spam):

A minimum of 10 XDB need to be staked to activate an account and are exclusive to that respective account. This can be thought of as the “cost” of opening an account. Because these tokens are unable to move while the account holds tokens, they can be considered removed from the circulating supply. This works to slow token velocity and reduce the active supply of the token.

The transaction fees for use of the DigitalBits network are also paid using XDB and work to deter redundant transactions, inherently reducing the turnover of XDB. Transaction fees are returned to the algorithmic pool for future distribution per the rules underlying the algorithmic pool.

Bridge Token:

XDB can act as a bridge token to facilitate transfers and/or trades between asset pairings that may not have a large direct market. As a bridge token, XDB is able to interact with a number of different tokenized assets, creating the possibility for a large number of situations where it is both bought and sold — whether or not it is the beginning or end result in the transaction between other assets.

XDB is able to experience increased liquidity when a part of multiple asset pairings — but will also experience an increase in token velocity as it changes hands.

Conversely, the more brands that become available on the DigitalBits network will ultimately bring with them more accounts, all of which will be required to stake the necessary minimum of 10 XDB per account in order to activate. In this way, the network enables assets to move between entities, while slowing token velocity through the use of more tokens as the network gains traction.

Low cost payments & remittances:

Low cost payments and remittances are not novel use-cases of XDB — many tokens on the market are capable of doing this. Protocol’s that exclusively act as a “medium-of-exchange” are under threat from experiencing high token velocity and the token depreciating in value. XDB’s utility is not limited to payments and remittances, and as such, it is unlikely it will be utilized solely as a “medium-of-exchange” token.

Node Operator Program (NOP):

DigitalBits intends to launch a NOP that will require qualified node operators to stake a given amount of tokens in order to receive rewards. This amount must be maintained in order to remain involved in the program. The staked tokens will remain inactive as long as the participant belongs to the program, and will reduce the number of active tokens on the network — slowing token velocity. Conversely, XDB tokens that are paid out as rewards can be sold immediately — this appears to be the precedent when operators receive rewards — reference Bitcoin miners. If there is an immediate sale of tokens by these recipients, it will increase token velocity.

In the diagram below 1 000 000 XDB is given as an example amount for staking. As the NOP is currently under development, the official staking amount has yet to be determined. However, the relationship between required stake and rewards will result in more tokens being “staked” than paid out as rewards, netting an overall reduction in token velocity.

Algorithmic Dissemination:

Algorithmic dissemination is a novel method to the distribution of reserve tokens. DigitalBits was forked from the Stellar network. Stellar utilizes an inflationary method to distribute reserve tokens. As for the DigitalBits network, there is no inflation of the total supply of digitalbits (XDB) token. According to the Stellar protocol, XLM is distributed on a weekly basis — adding XLM to the network a rate of 1% annually. Under this approach, regardless of the state of the Stellar network, the circulating supply will continue to increase.

Each week, XLM tokens are distributed to accounts that receive in excess of 0.05% of the votes (1 lumen = 1 vote). Assuming account holders vote for themselves, they will receive a proportional distribution from Stellar’s inflation pool — maintaining the accounts relative wealth. However, this poses a threat to smaller account holders who do not meet the 0.05% requirement. Community members have set up pools to aggregate the votes of multiple smaller accounts to satisfy this requirement — however, the payouts are left up to the discretion of the party running the pool, which may be subject to fees or delays. To be clear this is not always the case, for example, the Lumenauts run pool pays out all inflation tokens to its members.

Conversely, DigitalBits algorithmic pool will use mathematical algorithms to distribute reserve tokens. By rewarding users for certain aggregate network and individual account usage, DigitalBits encourages the use of its blockchain and the XDB token. In this way, all network participants are eligible to receive rewards. Additionally, any tokens from the algorithmic pool that eventually get added to the circulating supply will be proportional to the activity on the DigitalBits network — and will only increase as network activity increases. With the supply of XDB also growing in relation to the network’s usage, XDB protects its token from the effects of inflation and ensures that the amount of tokens in circulation is suitable for the state of the network.

Network Overview:

Disclaimer:

This document is for information purposes only and has been created to provide a general overview of the DigitalBits network and the XDB token. For further details, please reference the DigitalBits whitepaper.

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That’s it for now, thanks for reading and stay tuned for “Piecing it Together Pt. 6”

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